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BV10 LTD AGAINST ALLANVALE LAND INVESTMENTS LTD AND OTHERS AND ALLANVALE LAND (LINLITHGOW) LTD AND ANOTHER [2023] ScotCS CSIH_14 (21 March 2023)
URL: http://www.bailii.org/scot/cases/ScotCS/2023/2023_CSIH_14.html
Cite as:
2023 GWD 11-111,
[2023] ScotCS CSIH_14,
[2023] CSIH 14
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2023] CSIH 14
CA130/21 and CA131/21
Lord President
Lord Woolman
Lord Pentland
OPINION OF THE COURT
delivered by LORD CARLOWAY, the LORD PRESIDENT
in the reclaiming motions
in the causes of
BV10 LIMITED
Pursuers and Respondents
against
ALLANVALE LAND INVESTMENTS LIMITED and OTHERS
and against
ALLANVALE LAND (LINLITHGOW) LIMITED and ANOTHER
Defenders and Reclaimers
______________
Pursuers and Respondents: MacColl KC; Morton Fraser LLP
Defenders and Reclaimers: RG Anderson; Murnin McCluskey, Glasgow
21 March 2023
Introduction
[1]
BV10 maintain that three stock transfer forms, which were executed in terms of loan
facility agreements require the reclaimers to register them (BV10) as members (shareholders)
in the Allanvale Land group of companies. The reclaimers argue that the transfer of the
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shares was intended only to be in security for loans which have now been repaid. The
commercial judge held that the agreements supported BV10's position. He ordered the
reclaimers to rectify the AL companies' registers to reflect the STFs. The principal question
is whether he was correct to do so. New arguments were presented during the reclaiming
process, including one relating to the powers of directors, given by the AL companies'
articles of association, to refuse to register a person as a member.
The Agreements and the Stock Transfer Forms
[2]
In 2019 and 2020, two groups of companies, the BV group and the Allanvale Land
group, entered into a series of agreements in terms of which BV8 and BV9 would make loan
facilities available to Allanvale Land Investments, Allanvale Land (Auchincruive) and
Allanvale Land (Linlithgow). These three AL companies are the reclaimers along with
members of the Kirkwood family, who control them.
[3]
Each facility agreement contained "conditions precedent" which required the
reclaimers to provide stock transfer forms. They transferred shares in the debtor AL
companies to BV10, which was entitled to the issue of share certificates in its name. The AL
group duly provided the STFs to the BV group.
[4]
In respect of the first, December 2019 agreement between BV8 and Allanvale Homes
(Adamton), the STF was to transfer 50% of the share capital in AL Investments to BV10. It
was to be signed by the "Guarantor", who was defined as James Vincent Kirkwood. It
purported to transfer 250 shares in AL Investments, "out of the name(s) aforesaid", which
was not James Vincent but Alasdair Kirkwood, to BV10. This agreement also stipulated that
there was to be a shareholders' agreement between the guarantor and BV10 in relation to AL
3
Investments. In turn the shareholders' agreement was executed. It described AL
Investments as a company with 500 shares, 50% of which were held by James Vincent
Kirkwood and 50% by BV10.
[5]
The second, March 2020 agreement, between BV8 and AL (Auchincruive), required
an STF of 100% of AL (Auchincruive)'s share capital, to be signed by "the Guarantor" (again
defined as James Vincent Kirkwood) to AL Investments and an onward transfer by the
guarantor of 50% of AL Investments' own share capital to BV10. On 19 March 2020, an STF
transferred 100 shares in AL (Auchincruive), which were held by James Vincent Kirkwood,
to AL Investments. On the same date, Alasdair Kirkwood's executor signed an STF of 250
shares in AL Investments, to BV10. The signatures on the two documents appear identical.
[6]
In the third, December 2020 agreement, between BV9 and AL (Linlithgow), the STF,
to be signed by the guarantor (again James Vincent Kirkwood), was to transfer 50% of the
share capital of the borrower (AL (Linlithgow)) to BV10. An STF of 50 shares in AL
(Linlithgow) to BV10 was signed by James Vincent Kirkwood on "22/18/2020" (sic; 22
December 2020).
[7]
With some minor variations, each agreement defined (a) "security" as meaning a
mortgage, charge, pledge, lien or other security interest, and (b) "security documents" as
meaning the floating charge, the standard security, and each guarantee that had been
entered into, along with any other documents creating a security or guarantee in favour of
the lenders (BV8 and BV9).
[8]
The agreements defined a default by reference to a number of events including
where the debtor AL company ceased to be wholly owned by James Vincent Kirkwood. The
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agreements expressly did not create any third party rights. They also contained an "entire
agreement" clause.
[9]
The STFs were delivered to BV10. None of the share certificates was issued. The
loan facilities were nevertheless drawn-down.
The reclaimers' articles of association
[10]
The articles of association for AL Investments provide that the directors may "in
their absolute discretion and without assigning any reason ... decline to register the transfer
of a share" (Art 12.1). The first sentence of regulation 24 in Table A is not to apply. That
sentence requires a company to provide a share certificate to its shareholders.
[11]
AL (Linlithgow)'s and AL (Auchincruive)'s articles are based on the Model Articles.
They provide that the directors may refuse to register the transfer. If they do so, a notice
giving reasons for the refusal must be given as soon as practicable and, in any event, within
two months.
The commercial judge
[12]
The parties pled their cases in the simplified manner which correctly characterised
commercial actions. BV10 averred that they had been provided with the STFs and were
entitled to be entered as members of the AL companies. Despite repeatedly requesting that
this be done, however, the reclaimers had refused to comply.
[13]
The reclaimers tabled a number of defences, some of which were no longer live.
They maintained that the provision of the STFs was solely for the "security and reassurance"
of the lenders. They had been intended to last only during the subsistence of the loans.
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BV10 had not requested implementation of the STFs until after the loans had been, or were
about to be, repaid. AL denied BV10's statement that they had repeatedly asked to be
entered into the registers of members.
[14]
The commercial judge noted that BV10 were suing on the basis of the STFs and not
the loan facilities agreements. He held that there was nothing in the agreements which
supported the reclaimers' position. They did not state that the share transfers were to be in
security for the loans, or could somehow be reversed once the loans were repaid. The
agreements dealt in detail with the security which was to be provided, but there was no
mention of the STFs in that context. The first, March 2019 agreement set out a long-term
arrangement in the form of a joint venture between BV10 and James Vincent Kirkwood, as
shareholders in AL Investments. There was nothing which brought the joint venture to an
end once the loans were repaid. The reclaimers' position was incompatible with the terms of
the joint venture, and with the entirety clause. BV10 were entitled to rectification of the
registers of members accordingly.
[15]
The conditions precedent in the first, 2019 and second, March 2020 agreements,
which had required the provision of an STF executed by James Vincent Kirkwood, must
have been in error. Alasdair Kirkwood had executed the relative STFs. The shareholders'
agreement provided for James, not Alasdair, Kirkwood, to carry on the business of AL
Investments jointly with BV10.
Submissions
Reclaimers
[16]
BV10 were seeking to turn a debt transaction into an equity transaction after the
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event. A lender who did not insist upon a condition precedent prior to advancing funds
was deemed to have waived that condition (Bank of Ireland v AMCD (Property Holdings)
[2001] 2 All ER (Comm) 894, at para [16]). BV8 and BV9 had not sought to implement any of
the STFs while the loans were outstanding. The proposition, that a lender could seek
compliance with conditions precedent after repayment of a loan, was a remarkable one.
[17]
BV10's position did not reflect the agreements and led to an uncommercial result. It
was inconsistent with their position that a default would occur if the AL debtor ceased to be
owned by James Vincent Kirkwood. If the lender sought registration of the STFs, a default
would occur. Fundamentally, BV10 were not a party to the facility agreements. Each
agreement provided that no third party rights arose.
[18]
The reclaimers' case was not bound to fail at proof. BV10 had made no averments
about the presentation, or rejection, of any of the STFs in accordance with the companies'
articles of association or the Companies Act 2006. The reclaimers had averred that no
requests to formalise the transfer had been made.
[19]
Following upon an amendment, which was made after the first instance decision, the
reclaimers advanced a new argument. Shares in a private company could only be
transferred in accordance with the company's articles of association (2006 Act, s 544). The
judge held that BV10 were suing upon the STFs. In contrast to English law, a deposit of a
share certificate did not create a right in security in Scots law. Security over shares in a
Scottish company could only be taken by registration of the transfer (Enviroco v Farstad
Supply [2011] 1 WLR 921). The articles gave the directors of the AL group of companies a
discretion to refuse a transfer. There were limited controls on a director's discretion to
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Fawcett [1942] Ch 304 at 308). BV10 had no freestanding right to registration as a member by
virtue of the STFs (Lyle & Scott v Scott's Trs 1959 SC (HL) 64 at 84).
[20]
The commercial judge erred in relying upon the shareholders' agreement. The AL
companies were not parties to that agreement. BV10 were not shareholders until
registration of a transfer. The agreement could provide no more than context. The judge
had erred in correcting the conditions precedent in the agreements to read Alasdair, instead
of James, Kirkwood. Such an approach was not permissible under the orthodox rules of
contractual construction.
BV10
[21]
The reclaiming motion arose because the Kirkwood family and the AL companies
sought to avoid having to transfer the shares. They were part of the loan transactions and
not security for the loans. The loan facility agreements imposed no restriction on the period
during which the shares were to be owned by BV10. The STFs were not "Security
Documents" in terms of the agreements. The reclaimers' averments regarding the transfers
being only in security did not reflect the terms of any of the agreements. There was no
averment of any collateral agreement. The new argument founding upon the default
provisions was without merit. The transfer of the shares to BV10 was envisaged by the
relative agreement. The lending BV company had consented to the transfers; no default
would take place when they occurred.
[22]
The commercial judge was entitled to dismiss the case without hearing evidence.
The criticism of BV10's pleadings was ill-founded. BV10 had made averments regarding the
reclaimers' refusal to amend the registers of members. No substantive response to that was
made by the reclaimers.
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[23]
The argument that directors of companies had an absolute right to refuse to alter the
register had not been advanced before the commercial judge. In any event it was
misconceived. The right was qualified in the sense that it had to be exercised fairly and
reasonably, and not capriciously or corruptly (Stewart v James Keiller & Sons at 678-9; Super-
Kirkwood was the controlling mind of the AL companies. He had entered into the
agreements through them. He was not now entitled to avoid implementation of the STFs.
No averment had been made that the directors had determined that the registration ought to
be refused, far less that they had done so prior to the expiry of the two month time limit
(2006 Act, s 771(1)). The reclaimers' argument that the shareholders' agreement did not
provide BV10 with a free-standing right to registration was without merit. The judge had
not proceeded on the basis of such an analysis. In the context of the present dispute, and for
the reasons he gave, the judge was correct to construe the reference to James Vincent
Kirkwood in the conditions precedent as an error.
Decision
[24]
Central to an understanding of the principal issue is a simple fact. BV10 are suing
on the basis of the stock transfer forms, not upon the loan facilities agreements. It follows
that no question of third party rights arises. There is no indication in any contractual
document that the provision of the STFs was intended only to be a form of security for
repayment of the loans. The agreements dealt with what security was to be provided in
detail and said nothing to place any limitation on the proposed share transfers. The creation
of a joint venture company between BV10 and James Vincent Kirkwood, in respect of the
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first, 2019 agreement, runs contrary to the reclaimers' contention. There was no provision
bringing this venture to a close once the loan was repaid. There was no agreement that BV8
and BV9 would not intimate the STFs to BV10 or that they would be cancelled or returned to
the reclaimers once the loans had been repaid. No background circumstances were averred,
by way of context, which point to the STFs being intended only as security. If commercial
common sense were to be applied to the terms of the loan facilities agreements, the obvious
purpose of the STFs was to give BV10 a stake in, and hence a measure of supervision and
control over, the companies to whom the loans were being made.
[25]
The fact that BV10 did not request the share certificates until near the expiry of the
loans is not significant. They had possession of the STFs, so there was no need to obtain the
certificates in advance of drawdown. It was incumbent upon the directors of AL
(Linlithgow) and AL (Auchincruive) to complete and have ready for delivery share
certificates in respect of these two companies within two months of the transfer being
lodged with the company (Companies Act 2006, s 776(1)(a)). No share certificate required to
be issued by AL Investments in terms of that company's articles of association.
[26]
There are two final points. First, the reference to James Vincent Kirkwood as the
grantor of the STF referred to in the first, 2019 agreement must have been a clerical error. He
could hardly have transferred his own shareholding in AL Investments and then
participated, as a 50:50 member, in the joint venture with BV10. This point is of no moment
given that an STF was executed, albeit by Alasdair Kirkwood. Given that the relevant share
transfers were agreed in terms of the facilities agreements themselves, that which resulted in
James Vincent Kirkwood ceasing to own the entire capital of one of the companies cannot
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logically amount to a default; that is an occurrence in breach of the agreements, since that
cessation would have happened in line with the agreements.
[27]
The reclaimers' belated new argument about the discretion of directors to refuse to
register new members falls to be rejected. Where, as here, articles of association give the
directors such power, it must be exercised "as soon as practicable and in any event within
two months after the date on which the transfer is lodged" (Companies Act 2006, s 771(1)).
Unless the articles provide otherwise, reasons must be given. Whether reasons require to be
given or not, a decision to refuse must be made bona fide in the interests of the company. The
refusal would have to be fair and reasonable, rather than capricious or corrupt (Stewart v
James Keiller & Sons (1902) 4F 657, Lord Trayner at 678-9). The reclaimers maintain that there
are no averments by BV10 which deal with the lodging of the STFs. In fact BV10 do aver
that they have repeatedly requested that the reclaimers register them as members. In any
event, this action is a clear request that this be done. There are no counter averments that
the reclaimers: have considered the matter of registration; exercised any power to refuse to
register BV10 as members; did so as soon as practicable; or had a bona fide reason, in the
interests of the company, for refusing to register BV10. It is difficult to see what good reason
there could be, when the STFs have been executed by those now refusing to give effect to
them.
Conclusion
[28]
In short, there is no substance in the reclaimers' central contention that the STFs were
only a security, or an attempt to create one. In these circumstances, the shares must be held
as transferred. BV10 are entitled to be registered as members in terms of the STFs. The
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court will, in essence, refuse the reclaiming motion and adhere to the interlocutor of the
commercial judge dated 25 August 2022. The interlocutor will specify with greater precision
the orders made by the court and a time within which the orders are to be obtempered.
